When investment is a fine art

The fickle trends of the art market can paint inexperienced investors into a corner. Novice investors will do well to treat artwork as an aesthetic investment rather than a financial one.

A 1969 Francis Bacon painting of his friend and rival Lucian Freud sitting on a chair recently became the most expensive artwork ever sold when Christie’s dropped the hammer in November at a price of $US142.4 million.

Christie’s beat its own rival Sotheby’s, which had only set the record in May 2012 when Edvard Munch’s more well-known pastel The Scream sold for $US119.9 million $A132.9 million).

Christie’s full-year sales released last month showed what a bumper year it was for the London-based auction house as sales increased 16 per cent to hit £4.5 billion ($A8.3 billion) in the 12 months ended December 31, up from £3.92 billion in 2012.

What was even more interesting in the result was the number of first-time buyers, up 30 per cent and now accounting for almost a quarter of Christie’s global sales.

It appears that those first-time investors are the newly-minted residents of Asia, the Middle East and Latin America, but the US still retains the largest share of the overall global art market (33 per cent, according to the European Fine Art Foundation).

Few of us have a cool $150 million to drop on a painting. Is it the case that more people are looking to art as a safe haven for cash, or perhaps for a return on investment not offered elsewhere?

The art market is a tricky one to navigate.  It doesn’t move as a block, like gold, instead working as a bunch of mini-markets. Money managers generally don’t advise clients to have anymore than about 5 to 10 per cent of their investment portfolio in something as risky as art.

If you can score some modern 20th- and 21st-century pieces, then you can currently sell those for record prices. But don’t start thinking that Victorian piece hanging on your wall is worth much because it, along with English watercolours and almost anything Japanese, are definitely out of favour.

Christopher Boswell, an art expert who runs CB Fine Arts gallery in Manhattan, says it is important to be conscious of whether you are buying art for how it looks or as an investment. He says the two don’t have to be mutually exclusive.

“I think that people can invest in something that they love and with the appreciation of their acquisition in mind,” he said.  “This approach has what has driven the growth behind my collection, which includes M.F. Husain, Laxma Goud, and Sanat Kar. All blue-chip artists out of India, and with impressive sales results.”

Boswell says that investors are looking at other portable investments, such as gemstones, wine and watches, in addition to art.

“In December last year, Sotheby's sold a giant flawless pink diamond for $US83 million in Geneva, the highest ever paid for a gemstone,” he said. “Then you saw Christie’s also set a record for the most expensive work by a living artist when it sold a steel sculpture, Balloon Dog by American contemporary artist Jeff Koons, in November.  I think the record prices paid for these items tell the story about the sort of investments those people with money are looking for.”

Boswell says anyone thinking of investing in art should consider holding the piece for a few years and taking it out of circulation to drive up demand.

Art funds that disappeared during the financial crisis have started to return, indicating that more people are buying the ‘art as investment’ story.

These funds give mum and dad investors the chance to own a share of some artwork that they would not be able to afford outright.

But these funds too can be an unsophisticated minefield.

An October research paper by economics professors Arthur Korteweg, Roman Kraeussl, and Patrick Verwijmeren found that the index of fine art sales, the Blouin Art Sales Index (used by art investors to sell these funds), has an inflated 10 per cent return over the past four decades.  After an in-depth analysis of all items in the database, their paper found that this figure should be closer to 6.5 per cent due to a selection bias.

“Imagine two paintings were purchased at an art dealer in 1972, each for $US10,000. The career of one of the artists, Roy, took off, and the painting by him is sold in 2010 for $US20,000. The other artist, Tony, turned out to be a flash in the pan. That painting was never sold; but say, for the sake of argument, that it retained its $US10,000 value. As the artist faded from public view, it remained on the living room wall,” the authors said. “The art index uses the price appreciation for Roy’s painting to assign a value to Tony’s painting. According to that calculation, each painting is worth $US20,000. The index therefore would report the return on the investor’s original $US20,000 at 100 per cent — $US40,000, although in reality she realised only a 50 per cent return, as she owns paintings worth $US30,000, not $US40,000.”

Their conclusion is perhaps the best advice for novice investors.

“Buy paintings if you like looking at them. You can hope that your children will sell one or more of them later for a gain — but paintings are primarily aesthetic investments, not financial ones,” they said.

Mathew Murphy is a Walkley Award winning journalist based in New York.